A set of Chinese data released earlier today looked better-than-expected; the fixed asset investment unexpectedly accelerated in February, growth in industrial production slowed less than expected – a slowdown due to the Chinese new year break, while growth in retail sales accelerated to 4%, more than expected. The unemployment rate rose, however, and the worries regarding the property crisis and the shrinking population remain on the back of investors’ mind despite the AI-led boost in Chinese equities this year. To address the issues while the momentum is in favour, the Chinese authorities pledged to provide more support to stabilize stock and property markets, support wages and more importantly do something to boost the shrinking birth rates. The Hang Seng is up this morning by around 0.70% at the time of writing, the CSI 300 index shows reluctance to extend Friday’s nearly 2.50% jump before more details are unveiled from the Chinese authorities. Oil gained on Chinese stimulus prospects early Monday, but the gains are fully given back as the worsening trade war, its negative impact on growth global growth prospects, the possibility of a potential end to the Ukrainian war and OPEC+ production restoration plans keep the upside potential limited near the $68pb, with potential of a further fall toward the $65pb.
Germans have a plan
On Friday, Friedrich Merz reportedly reached an agreement with the Greens to unlock a EUR 500bn debt-financed spending bill on infrastructure and defence. The latter pushes the German yields higher, obviously, with the 10-year bund yield testing the 2023 peak. The euro continues to see support on the expectation that the extra spending will boost growth and even productivity in Europe. Massive spending could also boost inflation to some extent – which could require a more restrictive European Central Bank (ECB) policy than other wise – that is also positive for the euro’s valuation. As such, the EURUSD has its eyes set on the 1.10 psychological mark and the EURGBP is challenging the two-year descending channel on improved growth prospects for the continental Europe versus the deteriorating outlook across the Channel. Indeed, Friday’s data from the UK looked bad: the industrial production fell more than expected and the GDP growth turned negative in January. The British government’s plans to raise taxes are suspected to play a role in the growth slowdown, and the rising gilt yields narrow the prospects of spending and growth. The UK’s ability to secure a special treatment from the US in the growing tariff war doesn’t help. The Bank of England (BoE) is expected to maintain the rates unchanged this week. But against the dollar, the GBP outlook remains positive. Cable could well succeed another attempt to clear the 1.30 offers, as the growth prospects for the UK deteriorates less aggressively than for the US. And market valuations are very much impacted by the changes in growth expectations– which, in return, are highly influenced by the White House policies.
The rotation trade remains in play
The European Stoxx 600 remained well bid near its 50-DMA last week, the FTSE 100 managed to rebound above its 50-DMA after spending three sessions below this level last week, while the S&P500 tipped a toe into the correction territory following a four-straight-week and a 10% selloff. Friday’s session looked better for the US equities, as the oversold conditions attracted dipbuyers and the US politicians agreed to avert a government shutdown. But the news were not great, mind you. The consumer sentiment tanked to the lowest levels in the US since November 2022 while the long-term inflation expectations spiked to the highest levels since 1993 – that’s the worst possible combination for market sentiment. As such, Friday’s rebound may not lead to a sustainable rebound in US equities, and the US equities probably have room to extend their downside correction 5-10% more.
All eyes are on the Federal Reserve (Fed) this week. The Fed is expected to maintain the rates unchanged with a 99% certainty according to the activity on Fed funds futures. The dot plot and Jerome Powell’s comments could give hints regarding how the Fed is planning to navigate the tariff war hammering the US economic prospects. The US dollar is under pressure, while investors buy gold each time,they hear the word ‘tariff’. The yellow metal traded above the $3000 per ounce for the first time in history. The Bank of America said that the price of an ounce could increase to $3500 on geopolitical uncertainties and Bloomberg hints that gold is still from its inflation-adjusted peak of 1980 – which, in today’s prices, would stand near $3800 per ounce.
